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Beyond Gruber: How HHS Flip-Flopped on Federal Exchange Subsidies

By June 2015, the Supreme Court will rule on the issue of Obamacare insurance exchange subsidies in King v. Burwell, a case that could have significant ramifications for the Affordable Care Act (ACA). In implementing the law, the Internal Revenue Service (IRS) made individuals purchasing health insurance on both state and federally facilitated exchanges eligible for tax credits to offset part of the cost of the insurance. That rule violates the plain text of the Act, which makes such subsidies available only for insurance purchased on exchanges established by the states.

Obamacare supporters have defended the IRS rule on the grounds that the precise statutory language is a mere drafting error and that everyone involved in developing and implementing the ACA understood that subsidies were intended to be available on federal as well as state exchanges, in order to advance the ACA’s overarching goal of affordability. However, a growing body of contemporaneous evidence shows that even many Obama administration officials believed just the opposite—that subsidies would only be made available on state-established exchanges.

To date, the four lower court lawsuits on this issue have primarily focused on the intent of Congress as articulated via the wording of the law. In those cases, the plaintiffs have offered substantial evidence that Congress intended the limited availability of subsidies as an inducement for states to establish their own exchanges. But there is other important evidence of the administration’s intent—from both a legal and historical standpoint—that has gotten far less attention.

In the initial period after Obamacare’s enactment, how did the administration itself treat the statutory language? What were the Department of Health and Human Services (HHS) and Internal Revenue Service doing to implement the law? And what do those actions indicate about their original view about whether federally facilitated exchanges qualified for tax credits? Answers to those questions support the view that subsidies were never intended to be provided to individuals purchasing insurance on the federal exchange.

A February 2014 congressional investigation found that the IRS initially began developing a rule to make tax credits available only on exchanges established by a state. As the findings outlined below show, HHS had a similar understanding of the law. Here, it is important to note that in order for an exchange website to offer tax credits, it must have a tax credit calculator that allows individuals to view the actual cost of their coverage after tax credits have been applied to their premiums. Official documents show that while HHS moved quickly after the ACA’s enactment to help state governments make tax credits available through state-based exchanges, for nearly two years, it developed its HealthCare.gov website without any effort to offer tax credits on the federal exchange.

The following timeline demonstrates that HHS initially set out to establish its federal exchange, HealthCare.gov, without a tax credit calculator—that is, it set up the federal exchange so that it could not provide users any information about tax credits. This strongly suggests that its original interpretation was that only residents of states that established their own exchanges were entitled to tax credits. It was only after many states decided against setting up exchanges that HHS and the Obama administration changed course and began claiming that the Affordable Care Act allows tax credits for both state and federally facilitated exchanges. Only then did HHS begin developing a tax credit calculator for HealthCare.gov.